March 8, 2011

Stealing Health Reform's Subsidies

A controversial provision of the Affordable Care Act will raise revenue by forcing small businesses to report business transactions more faithfully. The law's critics and even some of its supporters have, for some time, been trying to change that provision.

Maybe these people have a point and maybe they don’t. But the alternative passed by the House and now under consideration in the Senate would undermine the law’s effectiveness while hitting some middle-income Americans with new financial penalties. And while the effects might be marginal, it’s a worrisome sign about how Congress may change the law in the next three years, before its full implementation.

Last week, the House voted to rescind the Act’s requirement that businesses file more paperwork on business transactions. And to pay for the change, they proposed to change the subsidies the Affordable Care Act will make available to poor and middle-income people buying insurance on their own.

How would the subsidies change? Well, imagine for a moment that it’s early 2014, you work in IT, and you've had trouble finding a permanent position. So you're getting by with a part-time retail job or, perhaps, you're cobbling together work as an independent contractor. During this period, you get health coverage through the Affordable Care Act's new insurance exchange and, because of your relatively low income, you qualify for substantial subsidies to help offset the cost.

But finally, within a few months, you find a permanent position with a major software company. You spend the rest of the year on the company insurance plan and, by the end of the year, yoru total income is somewhere in the mid- to high five figures. Under the law, as written, you’d have to pay back some of the subsidies when you file taxes the following year.

I was never wild about this arrangement. Most public subsidy programs, as far as I know, don’t operate on this sort of annual basis. But the payback scheme gave Congress another way to stretch the program’s funding and, at least, there'd be limits to what most individuals might owe. Under the current law, people who make less than twice the poverty line (around $44,000 for a family of four) would owe no more than $600 in extra taxes the next year. The maximum payback would be higher at greater incomes; people with annual incomes of more than five times the poverty line, around $110,000 a year for a family of four, could have to pay back their subsidies in full.

The new House plan, though, would ask people to pay back even more money: For example, people making between twice and two-and-a-half times the poverty line would owe a maximum of $1,500 instead of $1,000. (A chart from congressional Democrats, which Beutler has posted, has more details.) During last week's debate, House Democrats like Sandy Levin and Pete Stark called this change a "middle class tax hike" and, certainly, it would qualify as one by Republican standards.

The policy worry here is that higher penalties will make people marginally less likely to sign up for subsidies and enroll in coverage. No less important, though, it takes more money out of the pockets of some lower- and middle- (as well as upper-middle) income people in order to ease a burden on powerful special interest—in this case, the business community. And it’s not the first time this has happened. Late last year, lawmakers reduced subsidies in order to finance higher payments to physicians (i.e., the temporary “doc fix.”)

The good news, I suppose, is that Congress is showing a real commitment to fiscal conservatism: After all, it could have simply repealed the 1099 provision without any offsets, simply adding the money to the deficit. But, as Austin Frakt notes at The Incidental Economist today, a disturbing pattern is emerging: “ACA’s subsidies are starting to function as a cash cow, paying for changes to the law.”

Note that this is yet another downside to the law’s delayed implementation. If people were already receiving subsidies, reducing them would be far more difficult. But few people even know the subsidies exist, let alone how big they will be. That makes them an easier target.